Elizabeth Fournier
Staff writer
The second Basel accord has not yet been fully implemented and already amendments are being proposed. The worldwide standard for capital adequacy is imperfect, a fact that even those who wrote it are willing to admit. On November 20 the Basel Committee for Banking Practice announced a "comprehensive strategy to address the fundamental weaknesses revealed by the financial market crisis related to the regulation, supervision and risk management of internationally-active banks." It expects to issue proposals for public consultation in early 2009.
The proposals (see box) are vague, and purposefully so, according to one regulatory partner who says the Committee itself doesn't know what changes should be made. But certain goals can be identified.
The main concern is how Basel II exacerbates market cycles, encouraging boom and bust. When times are good, banks appear to have an excess of regulatory capital, but when market prices fall they...